Employer-Provided Educational Assistance

If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer should not include the benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2. This also means that you do not have to include the benefits on your income tax return.

Caution: You must reduce your deductible educational expenses by the amount of any tax-free educational assistance benefits you received for those expenses.

Educational assistance program. To qualify as an educational assistance program, the plan must be written and must meet certain other requirements. Your employer can tell you whether there is a qualified program where you work.

Educational assistance. Tax-free educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. The payments must be for undergraduate-level courses that begin before January 1, 2002. The payments do not have to be for work-related courses.

TaxTip: Beginning January 1, 2002, this benefit has been expanded to include both undergraduate and graduate-level courses.

Educational assistance benefits do not include payments for the following items.

  1. Meals, lodging, transportation, or tools or supplies (other than textbooks) that you can keep after completing the course of instruction.
  2. Education involving sports, games, or hobbies unless the education has a reasonable relationship to the business of your employer or is required as part of a degree program.
  3. Graduate-level courses that are normally taken under a program leading to a law, business, medical, or other advanced academic or professional degree.

Benefit over $5,250. If your employer pays more than $5,250 for educational benefits for you during the year, you must generally pay tax on the amount over $5,250. Your employer should include in your wages (box 1 of your Form W-2) the amount which you must include in income.

Working condition fringe benefit. However, if the payments also qualify as a working condition fringe benefit, your employer does not have to include them in your wages. A working condition fringe benefit is a benefit which, had you paid for it, you could deduct as an employee business expense.